Bullish Bull Shoots the Bull - Day Two

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Good Afternoon,

A second bank suddenly found itself to be profitable after Citi's announcement the other day. Bank of America's expectations for a year in the black in 2009 encouraged a second rally of large proportions in the Dow this week, lifting it 247 points higher. The clear winner of the day however, was black gold. An 11 percent rise in the liquid commodity took place ahead of the OPEC meeting scheduled for the weekend. Clearly, someone is expecting a round of fresh output cuts from the cartel.

New York spot bullion continued with a gain of $17.60 this afternoon, and was quoted at $925.50 per ounce. Players were tallying a weaker US dollar which edged back towards 87.50 on the index, while crude raced higher, rising $4.55 to $46.88 per barrel. Silver climbed a 20 cents, quoted at $12.97 per ounce. Platinum at $1051 and palladium at $196 acted as if the market was on holiday, and remained as static as the new cars in your average dealership's showroom. While Ford's maneuvering and cash/credit situation gave rise to some hopes yesterday, BMW's run into a brick wall on news it lost nearly $1 billion in Q4 dashed hopes of an imminent automotive sector rebound.

European (and Asia) equities fell following news that German industrial production plunged, Spanish inflation turned into major disinflation, and Japan's economy contracted at the highest rate since 1974. If there were a market in courtroom stocks and litigation futures, it would be doing very well indeed.

Mr. Madoff was packing them in in Manhattan while refusing to admit to conspiracy and thus drag his aides into the Big House. Eventually, he was the one who packed and headed for his new residence. The one where the butler sleeps in the bunk above you.  

Sir (!) Allen Stanford invokes the Fifth - in essence saying "Good Luck" to investigators, and someone at Merrill will need to drink a fifth, now that the firm's misleading the US Congress on bonuses has come to light. Ah, to be an attorney today! Or a jailkeeper...

Now that practically every publication has been featuring shiny gold bars on the cover, a few words of advice from Interactive Investor International's Ceri Jones , over in the UK:

"The price of gold broke through the magic $1,000 an ounce barrier at the end of February, and although it fell back this week to $890 after investors took profits, the world and his dog are advocating that gold prices will continue to rise over the long-term.

 

One big driver of demand is gold's perceived value as a hedge against inflation at a time when money supply in the western world is soaring and threatens to shrink the value of currencies in circulation. Last week's move by the Bank of England will amount to £75 billion of easing in the next few months, part of £150 billion sanctioned by the Chancellor, which is equal to some 10% of UK GDP. The US has doubled its money supply in the last seven years, and in Europe it is at a 30-year high.

 

The other big driver is that new sources of gold are genuinely scarce. The leading gold mining nation, South Africa, has halved its annual output since 1998. The days of finding marble-sized nuggets in California are long gone, with most of the world's remaining gold existing only as traces in difficult regions.

 

Gold bulls therefore have a lot to support their argument that metal's price will continue to rise - as well as circumstantial evidence such as record withdrawals from banks, runs on supplies of gold coins, record volumes of trade in exchange traded funds and the sheer tangibility of the metal at a time when banking products can seem opaque.

 

There are two huge flaws in the bull arguments, however. The first is the contention that growth in demand will continue to come from jewellery sales in emerging markets.

 

Jewellery still accounts for two thirds of all gold demand, with India the world's largest consumer, devouring about one fifth of the world's supply, twice as much as China and the US. It is central to the 10 million weddings that take place in India every year, mostly in April and May, as part of the transactions that take place between families, and this accounts for the regular, annual pattern of price rises early in the year before falling back later in the summer.

 

This year, however, Indian imports have ground to a standstill. Figures from the Bombay Bullion Association figures reveal that gold imports to India dropped to 1.8 tons in January 2009 against the 18 tons in the same period last year, and fell back to almost zilch in February. Overall, demand for jewellery plummeted by 17% between the third and fourth quarters of 2008, according to the World Gold Council, and this trend will likely intensify in the coming months as the recession deepens.